What is a Dynasty Trust?
A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes, such as the gift tax, estate tax, or generation-skipping transfer tax (GSTT), for as long as assets remain in the trust.
These types of trusts differ from other trusts in the length of time they last and the control they offer. Depending on the state where the generation-skipping trust is established, they can last for hundreds of years.
Dynasty trusts allow wealthy individuals to leave money to future generations, without incurring estate taxes. Since a dynasty trust is an irrevocable trust, it cannot be altered or changed and has no specified termination date.
Grantors control how relaxed or how strict they want the rules for their Dynasty Trust. However, once the trust is funded, their power comes to a halt. They are not longer permitted to change the rules or terms of the trust. The same rules also apply to the future beneficiaries.
A Dynasty Trust provides for a beneficiary during their lifetime and upon the primary beneficiary’s death, the trust will be divided into sub-trusts – one for each of the beneficiary’s children. Upon the death of a beneficiary’s child, the trust will continue to divide into sub-trusts for the next generation, continuing down the bloodline until the funds diminish.
Advantages of Dynasty Trusts
Dynasty Trusts have several unique benefits that make them an attractive option to wealthy individuals who want to leave their assets to multiple generations. Benefits are broken down into two categories: tax benefits and family benefits.
Avoiding federal estate tax is one of the main advantages of a Dynasty Trust. There are certain rules and regulations that apply to this tax exemption, and it’s always best to consult with an experienced estate planning attorney.
Generation Skipping Transfer Tax Exemption - The GST tax’s purpose is so the transferor cannot avoid transfer taxes by “skipping” a generation.
Avoid Double Estate Taxation - In a Dynasty Trust, assets are excluded from the estate tax calculations for your and future beneficiaries’ estates. The trust assets remain in the trust and not in your beneficiaries’ estates.
Protection of Family Values - Dynasty trusts allow the grantor to direct how funds and assets will be released to future generations. This allows the creator to determine how much, and in what situations, that funds will be released.
Asset Management and Protection – Dynasty trusts provide a long-term way for managing assets for the benefit of your heirs. Because the trust is irrevocable it can be designed to protect beneficiaries from creditors.
Avoid Probate – Like most trusts, a Dynasty Trust can also eliminate the need for probate court.
Is a Dynasty Trust Right for Your Family?
Dynasty Trusts are not for everyone. Although there isn’t a minimum dollar amount required to contribute to a Dynasty Trust, this type of trust is best for individuals with large, taxable estates.
It’s ideal for ultra-high net worth individuals with significant assets who want to manage their wealth across the generations. An example of someone who would benefit for a Dynasty Trust is someone who sold a profitable family-owned business or has a very large estate that they want to pass down for generations.
A Dynasty Trust does not make sense for anyone who doesn't need the trust to last for several decades. There are several less complicated types of trusts to choose from depending on your unique situation.
Planning a Dynasty Trust for future generations is complex. You can design the trust to be flexible and allow certain levels of control to certain beneficiaries. Then, it’s vital to take into consideration state and federal taxes, as well as detailed estate planning. Plus, not every state allows Dynasty Trusts.
To ensure you’re making the best decisions, consult with an attorney who can help walk you through the process and determine the best course of action.